Did we not vote to defederate exploding heads several days ago?
I was there, I saw the thread. @TheDude, did you? It was pretty strongly in favour. Do we really need to keep waiting around to see if an instance administrated by a guy who wants to declare "cis" a slur is going to turn out okay?
I think you are right and rule should be simple: if they are doing something illegal ban them immediately. If not, go and change the laws and don't force us to be judges and responsible, because it can become easy to defederate anyone.
Today it is about transfobia (which I would hope not to have anywhere near me) but tomorrow might be something what is not bad, but some people just don't like.
We will end up in the same hateful place reddit has been for some years now.
TLDR: We should change the laws and not fight with virtual ignoring.
It's quite funny to envision legality being the only criterion to take into account for defederation: my home instance as well as any other indulging into media piracy, which is widely considered as theft or counterfeiting, would be blocked, but not hateful instances as long as they can "hate civilly", shall we say.